[This post was first published in the Fairfax NZ Sunday Star Times on 8 March 2015]

The New Zealand Government has set itself a target of doubling agri-food exports between 2012 and 2025. The big question is where is this growth going to come from?

The target has been set in constant value dollars following adjustment for inflation. It requires an annual compound growth rate of about 5.5 percent. In nominal terms, before adjustment for inflation, the annual target will need to be even higher.

There are four main sources of potential growth. The first is increased physical production. The second is more value-adding of commodities into sophisticated ingredients and consumer products, and the marketing thereof. The third is through agri-food technology exports. The fourth is increased prices.

Over the next few weeks I will address each of these. But in this article I will focus on the last of them: increasing prices.

The big message is that our economic growth over the last fifteen years has indeed largely been fuelled by increasing agri-food product prices. We would be unwise to assume that the next ten to fifteen years will be so kind to us. It is going to take a lot more effort if New Zealand is to take the next quantum leap in agri-food exports.

The major drivers of increasing agri-food export food prices over the last fifteen years have been events outside the control of New Zealand. The qualification to that statement, and it is an important one, is that both Labour and National Governments have negotiated a series of important trade agreements. The China and ASEAN agreements are clearly the most important of these. However, it is also clear that increasing agri-food prices, despite considerable volatility, have been a global phenomenon.

The key driver of these increasing agri-food prices has been the basic laws of supply and demand, with the rise of China and other Asian countries having a profound effect. A second influence has been the reduction of subsidised exports, particularly out of Europe. These subsidies had the effect of distorting market prices, particularly for dairy products. A third factor has been the diversion of food-producing land for biofuels.

The full extent of the price increases has been easy to miss. When priced in American dollars, it is clear that dairy has been the big winner, followed by red meat industries, and then seafood [see graph]. Forestry and horticulture have benefitted much less. In comparison, aluminium rose through to late 2008 but has never recovered since the early days of the Global Financial Crisis (GCF). The overall message is that food has been the sector to be in, with the protein-based foods being the leaders.

The graph of international prices shown here does not fully capture the dairy decline throughout the second half of 2014, but the overall finding remains. The Global Dairy Trade website (www.globaldairytrade.info), which documents international dairy prices back to 1999, shows that the lowest auction price for whole milk powder (WMP) in 2014 was still 47 percent higher than prices at the turn of the century.

When expressed in New Zealand dollars, the benefits to farmers of increased international prices have been considerably less. This is because the NZ dollar has greatly appreciated over the last 15 years.On a trade weighted index (TWI) basis the New Zealand dollar in March 2015 is more than 40 percent higher than at the turn of the century, despite some softness in recent months.

Within New Zealand, the higher exchange rate has been sufficient to more than negate the increases for some products, but the trends for dairy and meat remain strongly in positive territory.

Of course this higher exchange rate, which to a considerable extent is itself a response to high export prices, is one of the key ways in which the rest of the community benefits from agri-food exports. Fuel, cars and overseas travel have all become much cheaper than they would have been. Also, each dollar of export income supports between three and four dollars of internal economic activity.

All of the above leads inevitably to the conclusion that New Zealand has been lucky in the last fifteen years to have an economy based on agri-food. It would be remarkable if such good luck was to continue for the next fifteen years at a level that can drive the next quantum leap of economic prosperity. Accordingly, the next fifteen years are going to require a lot more innovation and investment.

Where is that going to come from? Do we have sufficient research and development in place? What about education? And are we investing in the right areas? These are issues I will take up in the coming weeks.

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.